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Perspectives on Challenges and Opportunities for Banking and Finance Professions in Arabia

By Gordian Gaeta

01 April, 2007

Global economic forces are shaping the world we live and work in. These changes transcend national, ethnic or religious boundaries and impact Arabia as much as any other fast growing, modernizing and globally competing region of the world. They profoundly affect labor markets - the banking and finance professions are in the midst if not at the forefront of the challenges ahead.

Advanced finance markets have moved from the traditional cash markets to futures and derivatives products, from simple transactions to complex, cross border structures and from single, bricks and mortar channels to multiple distribution platforms. As a consequence, much of the work force had to migrate towards a much more knowledge intensive set of activities. At the same time, customers have started to demand a higher level of competence and advisory capability. Competition has fuelled client expectations and information technology allows them to compare product offerings and prices. A shift away from products towards customer needs and service has changed the orientation and culture of productive staff. Management is forced to adopt a radically different approach to motivating and leading a knowledge based and service oriented work force. Pace and degree of these developments depend much on the regulatory framework, prevailing economic conditions and customer demographics but one way or another, earlier or later, sweeping changes will come knocking at the door of Arabia’s banking and finance professionals. This represents both a great challenge and a formidable opportunity.

In Arabia, private and to a lesser extent public sector finance professions employed in banking, securities, insurance and corporate finance functions are experiencing a tremendous influx of foreign labor. Integrating markets with global products allow full substitution of labor from other parts of the world limited only by language ability and local labor laws. In the GCC countries, private sector employment was 72% expatriates and only 28% nationals. At the same time, GCC countries have one of the youngest labor force compared to all other major economies or economic regions. If Arabia continues to substitute national labor in finance though imports in the higher paying private sector, young nationals interested in finance will face the daunting prospect of what they can aspire to other than underemployment or at worst unemployment.

Much public and private effort has been committed to the education systems of all Arabian nations. However, education mostly addresses the issues of ‘why’ and tends to fill the younger generation with more or less useful, sometimes disputed knowledge about facts, concepts and theories. Once they leave school or higher education they still sorely lack training or development on the ‘what’ and ‘how’ of a professional, finance related career. This gap is not unique to Arabia - across the world, on the job training and practical development training moulds younger and talented local workforce into productive and experienced staff. However, Arabia’s unique labor markets pose real barriers.

The first barrier is the high level of labor substitution. There is a difference between substitution and augmentation of a labor force through foreign import. Substitution displaces opportunities for nationals that do not match at hiring the education or experience of imported labor. Augmentation through specialized skills is a well accepted path to development and does not limit the opportunities of young nationals, in the contrary, it provides generally time limited leadership, guidance and on the job development opportunity. In developed economies labor import simply fills gaps (generally a requirement for work permits) or transfers knowledge across borders often within corporations. Not so in Arabia. The gap is more of a large hole and insufficient is done to start filling the hole with nationals. Also transfer of knowledge occurs at best between foreign and local corporations (due to the limited global presence of Arab finance organizations) and limits the interest of foreign corporations to become the training ground for nationals. Nationals at foreign institutions either fail – which does not augment the skills base of local institutions much when they join - or they succeed and remain in higher paid foreign companies (with exceptions duly recognized). This challenges local finance institutions to close the skills gap with foreign players.

Given the Arabian preponderance of foreign labor substitution in finance professions, young nationals are faced with low entry levels and a foreign, by definition less stable management team (due the understandable desire or need to return to the home country at some time). This means that the knowledge base and intellectual capital of foreign labor leaves with the foreign staff or young nationals have less promotion opportunity when expatriates stay. Either way, high labor substitution as opposed to time limited augmentation, stifles the development opportunities of young nationals. This all but demoralizes national talent in finance. Public entities balance aspirations of local talent increasingly less adequately and certainly less well.

The second barrier lies in the approach to development training. First, assuming equal distribution of professional training among staff, foreign labor by its relative importance gains the lion share of attention and compounds the challenge of young talent to succeed. Second, professional development training tends to focus on high performance, new opportunity and global market products, the very type of activities staffed in the first place by experienced imported labor. Adding to this disparity, development training is less extended; training and development expenditure among Arab finance institutions is lower than among comparable finance institutions.

Where to from here? Surely, the answer should not be to differentiate between nationalities but to pace entry requirements and the level of foreign intake with a goal of developing a stable and indigenous work force. Arab financial institutions and finance professions need to recognize the need to hire young talent and provide them with ongoing formal development opportunities over the life of their career. At the same time, a reverse labor substitution needs to take place once nationals have achieved required levels of standards. Even if thereby short term and tactical revenue opportunities are foregone, perceived competitive positions are weakened and additional expenditure is incurred, long term rewards heavily outweigh short term draw backs. A Chinese proverb says: if you plan for one year, you plant crop, if you plan for a decade, you plant trees but if you plan for a life time, you train people. In our context this would read: if you plan short term, you hire foreign staff with expertise, if you plan medium term, you hire a foreign management but if you plan long term, you hire talent - not experience - and train all of your staff to graduate your own people into management.

All organizations that deploy finance related staff, outside the already regulated activities such as chartered accountants, should adopt an investment policy of hiring annual batches of local talent – as do all major corporations globally – and train (locally and abroad) these staff to a level commensurate with the needs of the institution and the changing global markets. This includes regular continued professional development efforts. The issue of labor substitution will then resolve itself through market forces and will require no government intervention. Government intervention or regulation will unfortunately not help if finance institutions ignore the exigencies of long term growth in performance.

If we do not take the time or dedicate the resources to train young, inexperienced people and to further develop our more experienced staff, we should not be surprised if we face high volatility of staff, complex and costly management issues and ultimately less than optimal financial results because of a weak and fickle intellectual capital and 

and knowledge base.  It is not the SMEs who can do it.  Nor is it the responsibility of foreign organizations.  The responsibility rests squarely on the shoulders of the many Arab financial institutions and corporations to hire, train and develop their own finance professionals. 

We at the American Academy of Financial Management (AAFM) take this very seriously albeit on a much shorter time frame than a life time.  Our mission is to train individuals through all aspects and levels of the finance profession primarily the ‘what’ and the ‘how’ to a set of global standards.  We are dedicated to public and corporate development programs in finance in short and manageable units.

Notes: I thank my fellow board members Osama Al Rahma and Michael Vincent for crystallizing my thoughts and McKinsey for some excellent research on Arabia published in several of their McKinsey Quarterly (mckinseyquarterly.com)  

About the Authors

AAFM Fellow